Manufacturer’s Corner: Implied Warranties, Part 4

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In each of Parts 1, 2, and 3 of this series on implied warranties, we urged you to disclaim your implied warranties, and promised that we would soon tell you how. In this post, we make good on that promise.

Before we begin, however, we want to respond to a common objection from (usually small) manufacturers: “I make a good product that I stand behind, why do I need to disclaim warranties?” The reason is risk control. By disclaiming the implied warranties and standing behind your product with express warranties, you can ensure that the warranty you’re giving is the one you intend to give, not one that a judge thinks your industry, or your product, or your customer dealings compels. So by all means, stand behind your product – but be deliberate about it.

Now, how to disclaim the implied warranties? The short answer is that you include a provision in your terms and conditions that you are disclaiming all implied warranties. But here are a few traps for the unwary.

The implied warranty of merchantability must typically be disclaimed by name.[1] In other words, if your disclaimer doesn’t say “merchantability” in it somewhere, it still needs some work.

If your disclaimer is in writing – and, seriously, it had better be[2] – your disclaimer must be “conspicuous” to be effective to disclaim the warranties of merchantability and fitness for purpose. States are all over the board on what “conspicuous” means, and giving a “conspicuous” disclaimer only gets more difficult as you add intermediaries between you and the end user of the product.[3] Two steps you can take to help your cause, however, are to highlight the language and put it on the front of your terms and conditions.[4]

Don’t confuse a disclaimer of warranties with a limitation of remedies. They are dealt with separately in the UCC, and should be treated separately in your terms. If you fail to disclaim warranties and rely instead on a limitation of remedies, you run a risk of complete exposure if your limitation of remedies gets tossed by a court as being unconscionable or failing of its intended purpose.

Remember to give the document containing your disclaimer to your customer before closing the sale. Car companies used to get burned for this when they would put their disclaimers in the operator’s manual in the glovebox of the car, and the customer would not see it until after the sale. If you’ve bought a car recently, you know the salespeople are trained to show that disclaimer to you before you sign the paperwork. This is why.[5]

Your disclaimer of the warranty of merchantability will be written (and your disclaimer of the warranty of fitness for purpose must be written). But, if you decide that you want to roll the dice and rely on a verbal disclaimer, be sure your purchaser is an American for purposes of the UN Convention on Contracts for the International Sale of Goods. If your buyer is from another signatory country such that the CISG applies, your verbal disclaimer will be ineffective no matter how clear it was. On that note, just be aware of CISG generally. We’ll do a post on that soon.

We’re nearly to the end of our series on implied warranties. We’ll wrap it up with a post on how damages are calculated. But stick around, because we have a lot more issues that you need to think about as you reexamine your standard terms and conditions.

[Programming note: for those of you who read us through Lexology, you may have missed our recent post on the D.C. Circuit’s April 14 opinion striking part of the SEC’s final rule on conflict minerals – which is important to you if you’re a reporting company. It was flagged for Lexology’s capital markets readers, who probably found it very boring.]

[1] You can also do it through use of expressions like “as-is,” but that type of language excludes all warranties, and you probably want to make some express warranties.

[2] Indeed, it must be written to disclaim the warranty of fitness for purpose.

[3] Once upon a time, warranties only extended to a seller’s immediate buyer. Many courts have backed away from that rule, allowing an end user to sue a manufacturer for breach of warranty directly, without having to go through the distributor or retailer or whomever he purchased from. Unfortunately, the law on how to properly disclaim warranties to remote purchasers – given that the disclaimer must be “conspicuous” – hasn’t quite caught up. The better rule is that a disclaimer effective against an immediate buyer is effective against all subsequent buyers. See, e.g., Hoffman v. Daimler Trucks North Am., LLC, 940 F. Supp. 2d 347, 366-67 (W.D. Va. 2013). Some commentators, however, suggest that a manufacturer must place a conspicuous disclaimer on the outside of its packaging for the disclaimer to be effective against remote buyers, otherwise remote buyers have no way of knowing about the disclaimer – see, e.g., Spring Motor Distributors, Inc. v. Ford Motor Co., 489 A.2d 660, 680 (N.J. 1985) (Handler, J., concurring). A proposed amendment to Article 2 would have cleared the air (though at the expense of uniformity), but the Committee did not adopt it. This is a long footnote. If you’re still reading it, e-mail me and I will locate a prize for you. It will probably be a Spencer Fane mug but, I mean, we have other stuff in the supply room too.

[4] One tactic a manufacturer could deploy to mitigate this issue is to give the warranties, but shorten the limitations period on bringing an action for breach to one year. The provision shortening the limitations period isn’t subject to the conspicuousness requirement. I wouldn’t rely on this alone though – the better course would be to disclaim implied warranties, give an express warranty, and shorten the limitations period.

[5] By the way, don’t assume that this works in the reverse – e.g. that a buyer cannot assert an express warranty that he never saw before purchase. Some courts reach that conclusion, but not all of them.